ROSENBERG: 2014 Will Be The Year The US Economic Horse Breaks Out Of The Gate

Gluskin Sheff's David Rosenberg, who
has been turning increasingly bullish, has published his 2014
outlook.

Rosenberg thinks the U.S. economy will surprise to the upside
next year.

In fact, the title of his note is "The Year of the Horse: The one
that's about to break out of the gate."

Here's a brief summary of his ten major calls for 2014:

There is more upside potential in 2014 than downside
risks. Rosenberg thinks in 2014, the "upside macro
surprise shifts from the UK to the U.S." 1984, 1994, and 2004
ended up being surprise years, and Rosenberg writes that
investors should "beware of all years that end with a '4',
since they "all fit this bill of economic acceleration."

The stock market suggests that economic growth will
improve in 2014. The market is seen as a leading
indicator of growth. In the last 60 years, real GDP growth has
always been positive when the S&P 500 climbed 60%. Any
surprise in growth will be to the up side.

Fiscal headwinds will subside and business spending
could emerge as the key catalyst for growth next year.
2013 was rough with the "early year tax bite, the sequestering
and the government shutdown." But things are picking up. "The
deceleration to 0% productivity growth, which has a direct link
to profit margins, will finally incentivize the business sector
to invest organically in their own operations with belated
positive implication for capes growth."

The U.S. economy does not suffer from secular
stagnation. The economy had so far been held back by
household and federal government balance sheet repair.
Rosenberg expects the economy to surprise "to the high side
after a prolonged period of unsatisfactory post-recession
growth." But he points out that "the upside for next year from
a business or economic perspective as opposed [to] a market
standpoint is considerable."

The capital stock is very old and will be
replaced. "The last time the corporate sector allowed
its capital stock to get this old and obsolete was back in 1958
and then annual growth rate in volume capital spending rise to
from -6% to 13.5%," writes Rosenberg. "Revived capex growth is
likely going to emerge as a key bullish cyclical theme for
2014."

With the housing recovery's role in supporting the
economy, the torch will have to be handed over to the
consumer. "The flow of savings into the household
sector is now running in excess of a $600 billion annual rate,
up 6.4% from year-ago levels, and serving up a nice cushion for
the spending outlook."

Job market and consumer confidence improve.
Rosenberg thinks we are two or three months from seeing jobs
outside of the financial sector hit a new all-time high.

Future returns in the stock and bond markets will be
muted. In the bond market, coupons are low and banks
have been trying to fight deflation and this "limits the
potential for future yield declines, that it seems hardly
likely that there will be any capital gains down the road." The
stock markets in the U.S. has had 25% gains "in what has turned
into a backdrop almost exclusively reliant on multiple
expansion." Instead he thinks returns will have to be found in
"yield curve plays to credit strategies to sector
rotation."

The Fed will fall behind the curve. "There was
always this symbiotic relationship — the Fed would lead
the bond market, and then pay heed to what the market was
saying in return," writes Rosenberg. "The problem now is that
it is next to impossible for the Fed to heed a message from a
market that is trying to dominate."

Expect volatility as Janet Yellen prepares to take over
from Ben Bernanke. Volatility always becomes a
"watchword" during a transition of Fed chairs. What's more, at
least six Fed governors and bank presidents are set to step
down as well, which also means a new FOMC.